Rising Rates Lead Poorer Americans to Abandon Federal Flood Insurance

In 2021, the US Federal Emergency Management Agency (FEMA) revamped the rates for millions of homeowners enrolled in the National Flood Insurance Program (NFIP). This overhaul aimed to rectify decades of underpricing and align premiums with actual flood risks, which have been exacerbated by climate change. However, critics raised concerns that these higher, more accurate prices could drive homeowners—especially those with lower incomes—out of the program, leaving them without a crucial safety net in emergencies.

A recent study published in the Journal of Catastrophe Risk and Resilience supports these concerns. The research estimates that FEMA’s 2021 update, known as Risk Rating 2.0, has led to as many as 13% of homeowners facing the steepest premium increases dropping their flood insurance policies.

“Risk Rating 2.0 was designed to ensure that flood insurance pricing reflects property-specific flood risks,” stated lead author Jesse Gourevitch, an economist at the Environmental Defense Fund. “Our findings indicate that rising premiums are pushing many households—particularly those with lower incomes—to forgo NFIP coverage.” The study did not investigate whether these homeowners sought alternative options, such as private insurance.

Most homeowners insurance policies in the US do not cover flood damage, making the federally subsidized NFIP essential, as it provides nearly 90% of residential flood coverage. Established in the 1960s to enhance accessibility to flood insurance, the program has accumulated approximately $20 billion in debt to the US Treasury due to its practice of charging below actuarial rates. This approach has also failed to deter development in high-risk areas.

In response to ongoing challenges, the Trump administration formed a review council to explore potential reforms, downsizing, or even the closure of FEMA, which could significantly impact the future of the NFIP.

Risk Rating 2.0 employs industry-standard catastrophe models to assess property-specific flood risks. While some homeowners experienced decreases in their premiums, many others faced annual increases capped at 18% until they reached full risk-based rates. New policyholders were required to pay these full rates immediately.

Despite the reform providing clearer market signals regarding flood hazards, it risks further diminishing the already limited flood insurance coverage in the nation. Enrollment in the NFIP has been on a decline since 2009, when it peaked at 5.7 million policies; it currently stands at under 4.7 million. Although the private flood insurance market has expanded to fill some gaps, FEMA estimates that only about 4% of American homeowners currently carry flood insurance.

FEMA did not respond to requests for comments regarding the findings of the study.

“Flood remains the most under-insured physical risk in the US,” noted Firas Saleh, who oversees North American flood models at Moody’s Corp. and was not involved in the study. He pointed out that Washington state recently faced significant river flooding, resulting in over 100,000 evacuations, yet the NFIP holds fewer than 30,000 policies statewide.

The decline in enrollment coincides with rising property insurance costs nationwide, driven by inflation and an increase in climate-related natural disasters. Given that NFIP enrollment was already decreasing before the implementation of Risk Rating 2.0, the study aims to isolate how much of the post-2021 decline can be attributed specifically to this reform—a data point that FEMA does not track directly.

Utilizing FEMA policy transaction data, the authors applied statistical models to compare Zip codes facing significant premium increases with those experiencing smaller changes. They segmented the data into quartiles based on premium increases, discovering a decline in new policies ranging from 11% to 39% and a 5% to 13% drop in existing policies.

Further analysis segmented the results by Zip code wealth, revealing that those in the lowest-income areas were the most likely to drop their flood policies or not enroll in the first place.

The authors conclude that while the NFIP reforms have some positive effects, policymakers must take action to halt the decline in coverage. Potential solutions include means-tested subsidies and increased investment in risk reduction measures, such as local flood-control initiatives.

Photo: Floodwaters from Hurricane Idalia surround a home in Crystal River, Florida, in August 2023. Photographer: Christian Monterrosa/Bloomberg

Copyright 2025 Bloomberg.

Topics
Flood

In 2021, the US Federal Emergency Management Agency (FEMA) revamped the rates for millions of homeowners enrolled in the National Flood Insurance Program (NFIP). This overhaul aimed to rectify decades of underpricing and align premiums with actual flood risks, which have been exacerbated by climate change. However, critics raised concerns that these higher, more accurate prices could drive homeowners—especially those with lower incomes—out of the program, leaving them without a crucial safety net in emergencies.

A recent study published in the Journal of Catastrophe Risk and Resilience supports these concerns. The research estimates that FEMA’s 2021 update, known as Risk Rating 2.0, has led to as many as 13% of homeowners facing the steepest premium increases dropping their flood insurance policies.

“Risk Rating 2.0 was designed to ensure that flood insurance pricing reflects property-specific flood risks,” stated lead author Jesse Gourevitch, an economist at the Environmental Defense Fund. “Our findings indicate that rising premiums are pushing many households—particularly those with lower incomes—to forgo NFIP coverage.” The study did not investigate whether these homeowners sought alternative options, such as private insurance.

Most homeowners insurance policies in the US do not cover flood damage, making the federally subsidized NFIP essential, as it provides nearly 90% of residential flood coverage. Established in the 1960s to enhance accessibility to flood insurance, the program has accumulated approximately $20 billion in debt to the US Treasury due to its practice of charging below actuarial rates. This approach has also failed to deter development in high-risk areas.

In response to ongoing challenges, the Trump administration formed a review council to explore potential reforms, downsizing, or even the closure of FEMA, which could significantly impact the future of the NFIP.

Risk Rating 2.0 employs industry-standard catastrophe models to assess property-specific flood risks. While some homeowners experienced decreases in their premiums, many others faced annual increases capped at 18% until they reached full risk-based rates. New policyholders were required to pay these full rates immediately.

Despite the reform providing clearer market signals regarding flood hazards, it risks further diminishing the already limited flood insurance coverage in the nation. Enrollment in the NFIP has been on a decline since 2009, when it peaked at 5.7 million policies; it currently stands at under 4.7 million. Although the private flood insurance market has expanded to fill some gaps, FEMA estimates that only about 4% of American homeowners currently carry flood insurance.

FEMA did not respond to requests for comments regarding the findings of the study.

“Flood remains the most under-insured physical risk in the US,” noted Firas Saleh, who oversees North American flood models at Moody’s Corp. and was not involved in the study. He pointed out that Washington state recently faced significant river flooding, resulting in over 100,000 evacuations, yet the NFIP holds fewer than 30,000 policies statewide.

The decline in enrollment coincides with rising property insurance costs nationwide, driven by inflation and an increase in climate-related natural disasters. Given that NFIP enrollment was already decreasing before the implementation of Risk Rating 2.0, the study aims to isolate how much of the post-2021 decline can be attributed specifically to this reform—a data point that FEMA does not track directly.

Utilizing FEMA policy transaction data, the authors applied statistical models to compare Zip codes facing significant premium increases with those experiencing smaller changes. They segmented the data into quartiles based on premium increases, discovering a decline in new policies ranging from 11% to 39% and a 5% to 13% drop in existing policies.

Further analysis segmented the results by Zip code wealth, revealing that those in the lowest-income areas were the most likely to drop their flood policies or not enroll in the first place.

The authors conclude that while the NFIP reforms have some positive effects, policymakers must take action to halt the decline in coverage. Potential solutions include means-tested subsidies and increased investment in risk reduction measures, such as local flood-control initiatives.

Photo: Floodwaters from Hurricane Idalia surround a home in Crystal River, Florida, in August 2023. Photographer: Christian Monterrosa/Bloomberg

Copyright 2025 Bloomberg.

Topics
Flood